Well, I've opened the Tivo. All caps are perfectly flat.
So I went crazy and ordered a WD20EURS and a USB-SATA adapter. I hope I can get it set up and it fixes the problems. I will report back.

Got the drive. Connected via USB, ran the long diagnostics, restored a truncated backup to it with 1024MB swap, expanded, supersized, installed in Tivo. Came right up, soft boot also no problem. The programs recorded on the old drive were still listed, but pointed to nothing (as expected), so I had to delete them one by one. Shows 318 hours HD. Smooth.

What is the likelihood of a disk passing long diagnostics yet causing problems?

After replacing the HD I went ahead and also tested the original drive with the WD long diagnostics. It passed! I was crestfallen. With the new drive, however, I have not got a pixelation or audio glitch yet, but I have only watched it for a few hours so far, so it can still go either way.

So everything worked (I think) as the TIVO booted up and my cable card settings were on the new drive. Only thing is when I go into the system info it says Recording Capacity : Variable, up to 21 HD hours, or 184 SD Hours. I am assuming I should have a lot more with a 2TB drive in it?

I did select the yes button when it asked if I wanted to expand the drive. IS there anyways to verify if that is in fact to correct size?

So everything worked (I think) as the TIVO booted up and my cable card settings were on the new drive. Only thing is when I go into the system info it says Recording Capacity : Variable, up to 21 HD hours, or 184 SD Hours. I am assuming I should have a lot more with a 2TB drive in it?

I did select the yes button when it asked if I wanted to expand the drive. IS there anyways to verify if that is in fact to correct size?

This is bad. For some reason your TiVo is not seeing the entire drive. I would not recommend using it in this state.

What exact steps did you take to create the new drive? Was the source drive the stock 160GB drive? How were the drives connected to the computer?

First thing I did was run the wdidle3.exe to disable the Intellipark feature

Then I did the following....
1) I connected both the source drive and the new drive to my windows PC
2) I then ran the WinMFS.exe program
3) selected the source drive
4) selected Tools->Mfscopy to copy the original drive
5) selected the source drive to copy to and clicked start
6) After about 45 minutes it asked if I wanted to expand the drive, I selected YES (Not sure how long this should take...I waited a few minutes)
7) Clicked on the exit button and then ran the Tools->Mfsinfo on the new drive to make sure the copied stuff was there.

The drive appears to work fine as an exact copy, but I don't think the expansion thing worked. I am assuming it should say a larger number in the Recording Capacity under system settings correct?

First thing I did was run the wdidle3.exe to disable the Intellipark feature

Then I did the following....
1) I connected both the source drive and the new drive to my windows PC
2) I then ran the WinMFS.exe program
3) selected the source drive
4) selected Tools->Mfscopy to copy the original drive
5) selected the source drive to copy to and clicked start
6) After about 45 minutes it asked if I wanted to expand the drive, I selected YES (Not sure how long this should take...I waited a few minutes)
7) Clicked on the exit button and then ran the Tools->Mfsinfo on the new drive to make sure the copied stuff was there.

The drive appears to work fine as an exact copy, but I don't think the expansion thing worked. I am assuming it should say a larger number in the Recording Capacity under system settings correct?

Can I take it out and re-do it? Do I need to clear it at all?

When I expanded to 2TB on my S3 the expand option right after restoring the image did not work and had to use MFSAdd in WinMFS to expand the drive. Also don't forget to supersize afterwards to get the max available time.

__________________
"Delay is preferable to error" - Thomas Jefferson
"If I have seen further it is by standing on the shoulders of Giants" - Sir Isaac Newton

When I expanded to 2TB on my S3 the expand option right after restoring the image did not work and had to use MFSAdd in WinMFS to expand the drive. Also don't forget to supersize afterwards to get the max available time.

What does the MFSAdd do? Can I put the drive back onto my PC and just run that or do I have to do the entire process again?

You are welcome. Not sure why but WinMFS does not, at least for me, expand correctly right after a copy if I am expanding to 2TB . Have to tell it not to expand then manually click on MFSAdd to do the expansion.

__________________
"Delay is preferable to error" - Thomas Jefferson
"If I have seen further it is by standing on the shoulders of Giants" - Sir Isaac Newton

You are welcome. Not sure why but WinMFS does not, at least for me, expand correctly right after a copy if I am expanding to 2TB . Have to tell it not to expand then manually click on MFSAdd to do the expansion.

I've seen instances where with the MFS Live cd it was necessary to do

mfsadd

separately rather than just adding -x to the option string when running

I'm just so happy it worked. I got a used HD unit via Ebay and then transferred my series 2 subscription over to it since I have a HD TV now and couldn't use it no more. So for around $140 I got a high def unit with a massive amount of storage.

Thanks guys for the replies.
...Option A: Buy a 1TB from dvrstore.com already set up. This would work for me, provided dvrstore.com is reputable and sells new, not refurb drives.
...
If you were me, which one would you choose?

On 6/23/13 I placed an order for a TiVo DVR Upgrade for $139.99. I printed the order confirmation page that said that I would be notified when the order is shipped. I did not receive an email confirming the purchase. Today, 7/9/13, I logged into their website to find out why I had neither heard nor received anything from them. I found my order listed as having been cancelled on 6/27 - four days after I placed the order.
Sorry folks, I can not consider DvrStore.com to be "reputable."